Invest in renewable energy today with these 5 green companies

James Reynolds reveals and explains the reasons behind five of his favourite renewable energy stocks as well as the technology that gives them an edge.

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Windmills for electric power production.

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I’ve always seen great potential in renewable energy. Now that Cop26 has brought the climate crisis to the front page, national leaders are all searching for the solution to our energy needs. Luckily, there is lots of room at the table and there are already some amazing companies doing great work.

These are five of my top renewable energy stocks for the renewable revolution.

Hydrogen

Lithium-ion batteries might work for cars, but they aren’t energy dense enough to drive buses, diggers, lorries, or boats.

Hydrogen fuel looks like it will be the most viable replacement for petrol and diesel, especially for large, industrial machinery. Hydrogen can also be stored, transported, and then burned to heat homes.

The best part is that solar and wind farms can be used to make hydrogen.

Earlier this year, Prime Minister Boris Johnson announced his hopes that the UK would become the “Qatar of Hydrogen”.

ITM Power

Right now, ITM Power (LSE: ITM) is my top pick in this field. ITM builds modular hydrogen electrolysis machines. Because the machines are modular they can be easily bolted onto existing green energy infrastructure. The company does have a lot of debt right now but has recently raised £250m to fund construction of two new factories. It is poised to meet growing demand.

My main worry with ITM is that it has struggled to turn a profit and still isn’t forecast to do so for at least another three years.

AFC Energy

Another hydrogen company on my radar is AFC Energy (LSE: AFC). This Surry-based company manufactures the fuel cells needed to turn hydrogen fuel into electricity. I’m particularly bullish on AFC because it has a patent on alkaline fuel cells. Alkaline fuel cells use lower purity hydrogen than their non-alkaline counterparts. Cars, trucks, and even buildings using alkaline fuel cells will be able to be run at a far lower cost, giving AFC a competitive edge.

On the financial side, unfortunately, AFC suffers from many of the same setbacks as ITM power: high debt and a track record of low income.

But, just like ITM, revenues are up, and are projected to climb over the next few years. The market has a clear desire for hydrogen. JCB just signed a multibillion-pound deal with Fortescue Future industries to import green hydrogen all the way from Australia.

Hydrogen power still remains untested at a commercial scale. It’s a risky investment compared to some already established technologies. What I’m betting on is that to bring down carbon emissions, firms around the world need access to low carbon fuel that can be produced and used today. I fully expect these companies to have some growing pains, but to ultimately come out on top.

Wind

Within the UK, my top pick for a wind power-related stock is Greencoat UK Wind (LSE: UKW). This investment firm owns or partially owns 40 wind farms around the UK. Greencoat also has some of the best financials I have seen in the sector, operating with a net profit margin of 77.6% and paying a reasonable 5.33% dividend.

However it is a smaller company, and might be squeezed out by larger competitors.

Spanish energy company Iberdrola (LSE: 0HIT) is also on my radar. Iberdrola has a much higher market cap than Greencoat UK (£54bn and £2bn, respectively), but has a much lower net profit margin at 10.45%. Unlike Greencoat, Iberdrola builds its own turbines and funds in-house research and development.

Iberdrola recently announced it was building a massive wind farm off the coast of the UK. The company is also promising to help the Norwegian government construct two new offshore farms, capable of generating a total of 9GW of energy.

Iberdrola leads the charge in floating turbines. Offshore windfarms can only be installed where the water is shallow enough for the turbines to be driven into the seabed. Thousands of new deep-sea sites will become available to energy companies once floating wind farms are perfected.

To do this, Iberdrola has taken on a lot of debt. The UK wind farm will cost upwards of £6bn alone, so I’m uncertain about its short- to mid-term profitability.

If I had to pick one, I would choose Greencoat because of the higher profit margins and lower liabilities. But I think Iberdrola remains a very attractive option.

Solar

When people imagine solar power, they commonly think of photovoltaic generation (solar panels).

While photovoltaic technology has improved in efficiency, the core design has one unfortunate drawback. Solar panels are made from silicone, which has high electrical conductivity but a low melting temperature. Overexposure to direct sunlight causes them to overheat and lose efficiency. 

Because of this, my top pick for solar is Acciona (LSE: 0H4K), which is a leader in concentrated solar power.

Concentrated solar uses mirrors to focus sunlight on a single point, superheating a plant-based oil or rock salt, which is then used to heat water into steam and drive a turbine. Unlike solar panels, the hotter it gets, the better.

Concentrated solar has two more distinct advantages over panels.

  • Computers can adjust the mirrors to maintain energy production at peak efficiency throughout the day.
  • Heated elements can then be stored in insulated containers and used throughout the night.

Acciona is a conglomerate, and only one of its subsidiaries actually produces concentrated solar energy. I feel this makes the investment a little safer.

The firm has a market cap of £7.7bn and last year it brought in £5.4bn in revenue. Of this, £3bn was gross profit.

I think the biggest risk to this investment is that there is no guarantee that concentrated solar will gain the mass adoption needed to push the stock up. The 2.44% dividend payment is a reasonable consolation prize.

Conclusion

Renewable energy is the future, there is no doubt about it. The technology is here and some of it can even fit into our existing infrastructure. The best part about the green revolution is that, unlike tech, there’s room for everyone. So, I will continue to learn about the amazing new solutions that are emerging every single day. And in the meantime, I will be adding all of these to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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